Global slowdown and India

India’s grim exports scenario this financial year has at last woken up the government from tis slumber and rightly announced three per cent interest subsidy. With India’s exports declining for the 11th month running in October and no immediate recovery visible in the near future, the government decided to give a leg up to the declining exports by announcing the interest subsidy for five years providing that much head room for exporters to plan their strategy. This cheaper credit under the interest equalization scheme, approved by the cabinet committee on economic affairs on Thursday will be available from April one this year for both pre and post shipment rupee export credit.

This timely bailout came at a time when India’s exports fell 17.5 per cent year-on-year in October at $21.5 billion. Exports in the first seven months of the year were about $154.2 billion. In 2014-2015, India's exports had totalled $310.5 billion. Drugs and pharma, tea, cereal preparations, ceramic, minerals, electronics, textiles, carpets, jute, and plastics were the only sectors that posted a growth in exports last month.

“The decline in exports is worse than even that during the global slowdown. With this, reaching even $300 billion of exports this year looks difficult,” said Ajay Sahai, director-general of the Federation of Indian Export Organisations.

In fact India's merchandise exports growth, which clocked rapid growth of 15-20 per cent for several years seems to have come to grinding halt throwing into the winds all ambitious medium term targets. India reached the annual merchandise exports of $300 billion very rapidly but since then it seems to have got stuck around that figure with recession continuing to play havoc with the global economy. The rapid exports growth in previous years had made the earlier UPA government set an ambitious target of $500 billion annual exports by 2014-2015. That had gone awry.

The Narendra Modi government had in its foreign trade policy set a new ambitious target of $900 billion annually in the next years. Now that too appears to be virtually impossible as the economic situation stands today. The target was set while announcing new foreign trade policy in April last unmindful of the fact that merchandise exports in the year ended 31 March 2015 stood at $310.5 billion, down from $314 billion a year earlier and far short of the $340 billion target set by the government.

“One can’t shift to domestic markets overnight and the benefits of the export incentive schemes are yet to trickle down,” Sahai said as outward shipments declined in 20 out of the 30 industries, led by Iron ore, the latest official monthly trade data for October showed. Sluggish global demand, an overvalued rupee, declining imports from China and devaluation of the Chinese currency have deterred India's exports from growing despite the commerce department expanding export incentive schemes for various products and markets.

Though tepid global demand has dragged economy recovery, a significant aspect is that India's imports too have been falling with sharp decline in global crude oil prices and other commodity prices helping to keep India's trade deficit under check. The decline in imports was more pronounced than exports in October at 21.5 per cent to $31.12 billion. This ensured trade deficit of $9.7 billion, an eight-month low and down from $10.47 billion in September and $13.35 billion in the year ago period. Non-oil imports fell to $24.2 billion and were 9.93 per cent lower on year. Non-oil, non-gold imports, seen as a measure of domestic demand, fell 0.57 per cent to $22.75 billion.

Eighty per cent of India’s crude oil requirement is imported. The falling crude oil prices has not only brought down trade deficit but also current account deficit, besides significantly reducing subsidy bill thereby keeping fiscal deficit and government finances under check.

“Even as overall exports continued to record a substantial contraction, the narrowing de-growth of non-oil merchandise exports and the rise in the number of such commodities reporting positive growth in October 2015 offer a sliver of relief. However, the slide in growth of services exports in September 2015 after the double-digit growth posted in August 2015 is disappointing,” ICRA's senior economist Adity Nayar said.

The fall in imports was led by a 60 per cent decline in the imports of gold, 55 per cent in cotton and 45 per cent in oil. Declining gold imports indicate a combination of rural stress and lower investment demand because of the possibility of lower returns.

Gold imports are expected to reduce due to three gold related schemes launched earlier this month. The Gold Monetisation Scheme, Sovereign Gold Bond Scheme, and India Gold Coins are seen as a way to put the gold available with the country to productive use and thereby reduce imports and control the current account deficit. The current account deficit is now expected to narrow modestly to $8.5-9.0 billion in the second quarter.

During 2008-2009 global financial meltdown, India witnessed decline in exports for nine months in a row. This time it has been for 11 consecutive months. The sharp decline global crude oil prices was impacting India's exports as well. High value export item, refined crude oil exports have been declining sharply. In September the decline was as much as 60 per cent.

The restoration of three per cent interest subvention for exporters, which expired in

31 March by government was a welcome development as it would greatly help in salvaging the sagging exports. The three per cent interest equalisation would be available to all exports of MSME and 416 tariff lines. The scheme will help the identified export sectors to be globally competitive and achieve higher level of export performance. The scheme covered labour intensive and employment generating sectors like auto components, processed agriculture and food items, handicrafts, handloom products, fabrics and leather goods. This development is significant as it would help in kickstarting domestic economy as MSME accounted for 40 per cent of India’s GDP and manufacturing besides 45 per cent of country’s exports.

This was the third major announcement for exports in the last fortnight. On 30 October, the government expanded support to various products under the Merchandise Exports from India Scheme followed by a revision of a duty drawback rates for exporters two days ago. These developments are certainly reassuring to revive India’s exports but a lot more is needed to be done, particularly on ease of doing business in the country to ensure Indian industries and exports grow to its potential. The picture however does not look all that rosy in the near term as it would be couple years before India returned to high growth path of 9-10 per cent including high exports growth. IPA